LESI 2017’s Augmented Reality

Issued: April 18 2017

The number of artificial intelligence-related patent applications has been increasing rapidly. Countries such as China, Japan and the US, with the most AI related patent applications, have lifted such development to a national strategic level.

Development of AI has brought both chances and challenges for industries that have to adapt themselves to this trend. On the one hand, international IT giants such as Microsoft, IBM, Google, Sony and Qualcomm are active in AI-related R&D, aiming to preoccupy AI core technology all over the world, says Linhong Lv, a patent attorney at CCPIT Patent & Trademark Law Office in Beijing. “Through their strategic patent layout worldwide, these companies have possessed huge portfolios of patents in AI, escorting their present and future market competence.”

On the other hand, for traditional manufacturing industries, they will be deeply affected by AI, with a large number of jobs replaced by it. “It is important for them to actively utilize AIrelated technology to realize upgrading and transforming of industrial structure. In this respect, companies with foresight have been actively building the internet of things, which connects any asset from robotics to low-power devices across any platform or operating system, and make the patent layout to ensure future development,” Lv says. “When the time of AI comes, the IoT will become a large market and completely change the manufacturing industries. We will see what happens.”

There are other industry challenges as well, according to Christopher Rourk, a partner at Jackson Walker in Dallas.

“Fundamentally, new AI techniques can potentially be protected using patents, but doing so will likely require a level of disclosure that could allow competitors to copy. Furthermore, because such AI-related innovations are likely going to be implemented in software, it could be difficult to obtain patent protection even with a detailed level of disclosure,” says Rourk.

“For example, in the US, it is common to receive patentable subject matter rejections from US patent examiners for software-implemented inventions, even when the US patent office guidance for disclosing and claiming such inventions is followed. The US has also made it easier for such patents to be challenged in court and through administrative processes, and such challenges can be expensive to respond to, and have resulted in the loss of patent protection for commercially valuable inventions that provide substantial utility. As such, one industry challenge is to determine whether seeking patent protection for AI-related inventions even makes sense, particularly where such innovations can be protected as trade secrets,” he says.

While the patent system is generally acknowledged to foster innovation by creating an incentive for innovators to disclose their innovations, the hostility towards protection for softwareimplemented inventions in many jurisdictions makes it less attractive to risk disclosing such information in a patent application, and places a greater emphasis on treating such information as a trade secret, Rourk says. “Another alternative in some jurisdictions, such as the US, is to request non-publication of the application, so as to allow the public disclosure of such information to be limited if meaningful patent protection cannot be obtained.”

AI has also made it easier to understand the scope of patents that have issued that relate to a product, service or technology, and such AI “patent landscape” tools and techniques can be used by a company to avoid the patents owned by others, as well as to try locating parties that are infringing their patents. However, the types of analysis tools and techniques that are available are limited to the language and concepts that are used in the issued patents and published applications, Rourk says. “While these tools and techniques are useful and can help identify gaps in existing patent protection that can be protected by filing continuation or divisional applications, or concepts that are in the public domain and which can be used without infringing patents of other parties, they aren’t of much use for assessing the competitive landscape when innovations are not patented and are protected as trade secrets. Thus, another industry challenge is to understand how competitors are using AI when they are keeping information about such uses confidential.”

IP + Data = Big Business?

The continual increase in data generation, storage capacity and processing speed creates tools that can be used by business, but as discussed above, the ability for businesses to become aware of new opportunities for using such tools is a function of whether the existence of such tools is in the public domain.

“While the hardware improvements that result in such increases can be best protected using patents (both because the equipment can be reverse engineered, and because patent offices are generally more receptive to protecting that kind of technology), the software improvements that allow such tools to be applied to solving business problems are becoming more difficult to protect with patents,” Rourk says. “If the current antagonistic trends towards software protection continue, public IP such as patents could decrease in those areas, while private IP such as trade secrets could increase in importance. In that case, big businesses that are able to maintain the secrecy of such innovations could realize greater profits for a longer period of time than if they try to patent such innovations and end up getting narrow patent protection, or none at all.”

In the past 10 to 15 years, trademark holders even at the small- and even micro-businesses level have increasingly become aware of the importance of IP protection which is evident in the surge of IP filings, even in relatively young jurisdictions such as Indonesia, given its relatively affordable filing fees. “As a result, as these small start-up businesses expand, there becomes a bigger demand for even more prosecution and officeaction services, at least within the neighbouring jurisdictions. Generally speaking, all of this translates to a bigger pie thus a bigger business, albeit even more competition,” says Arno D. Rizaldi Setiawan Kwok, a partner at Kusnandar & Co in Jakarta. “With the abundance of IP attorneys and agents becoming more readily available and offering severe discounts to boot, clients are learning to become savvier in the way they choose their IP attorneys. In addition, catering to new IP owners is also no easy feat, as given the generally smaller sizes of their businesses and minimalistic understanding of IP, cost remains paramount and the never-ending topic of price continues to rage.”

In addition to the saturated pool of IP attorneys, companies continue to create, derive and even spin-off IP management tools independent from traditional IP attorneys, from providing services such as warnings and watches, creating payment gateways for various annuity payments and furthering IP education to its practitioners, to IP audit services and providing security assistances during investigation and raid activities to even creating menial computer reminders for due date alerts and the like, Kwok adds.

“Ultimately, the abundance of IP and data will only translate into big business if the party of concern can remain relevant throughout the shifts and paradigm changes within the industry. From simple prosecution to complicated office actions as well as the derivative services aforementioned, the IP industry will only grow in the future to come thus, as long as the cards are played right, it will all translate into big business for IP practitioners,” he says.

Licensing Makes Better Healthcare

The significance of IP licensing has greatly increased in the biotech and pharmaceutical industries for the past several decades. Both small and large pharmaceutical companies have built up financial or technical foundations for innovation in the cutting-edge biotechnology and pharmaceutical technologies through IP licensing. The same trend can be seen in the South Korean biotech and pharmaceutical industries.

What makes licensing an integral part of the biotechnology and pharmaceutical innovations is, among other things, the unique characteristics that are inherent to the biotechnology and pharmaceutical businesses. “Developing a new drug requires tremendous investment of resources. It has been reported that the average cost for developing one new drug is as high as US$2.6 billion and the average time necessary is between 10 and 15 years. The development of a new drug also involves a very high risk of failure,” says Hui Jin Yang, a partner at Lee & Ko in Seoul. “In fact, less than 1 percent of the candidate compounds examined in the preclinical studies make it into clinical trials, and only about 12 percent of such compounds entering clinical trials survive and obtain marketing approval. Further, the entire process of discovery, testing, and approval of a drug product mandates synergy of complex operations. Thus, developing a new drug often requires collaboration between small research firms and big pharmaceutical companies through licensing.”

Through licensing, such small research firms, acting as the licensors, can recuperate their initial investments early and continue with the process of additional R&D into a product, Yang says. “Big pharmaceutical companies, acting as the licensees, can enrich and strengthen their pipelines with licensed products. For the past several decades, licensing was one of the main routes of biologics coming out to the market. Among 30 new drugs approved in 2005, 67 percent have been licensed more than once.”

Licensing can work in the opposite direction as well. A big pharmaceutical company also licenses out its compound to small pharmaceutical firms, in particular, those that are interested in drug repositioning, which involves the process of recycling existing compounds, either shelved and never previously approved, or previously marked, through a new formulation or for a new indication.

“Drug repositioning has a significant advantage over traditional drug development because the drug to reposition has already gone through toxicity, pharmacokinetic and other tests. Thus, phase I clinical trial can be omitted,” Yang says. “This attracts small pharmaceutical entrepreneurs to draw their attentions to shelved APIs which the big pharmaceutical companies have labeled as a failed venture.”

Successful stories of small pharmaceutical firms’ inlicensing are many, and they include Imclone’s Erbitux for oncology treatment; Adolor’s Entreg, an acute care hospital treatment; Actelion’s Tracleer for congestive heart failure; Forest Laboratories’ Celexa for depression; and The Medicines Company’s Angiomax, which is an anti-thrombolytic therapy. The market capitalizations of these small pharmaceutical companies often exceed US$1 billion, and their collective revenues from these in-licensed products exceed US$3 billion.

Traditionally, South Korean pharmaceutical companies have placed their focus on generics. However, this trend is changing, and licensing is receiving more attention in the market. “The motivations behind this change can be attributed to the severe competition and profit reduction in the generic business,” Yang says.

This made at least some of the traditional pharmaceutical companies, such as Hanmi Pharmaceutical, Daewoong Pharmaceutical, and Yuhan, turn their eyes toward developing new drugs. Their new business strategy, Yang says, is to develop a new drug and license it out to big global pharmaceutical companies since they do not have enough resources and confidence to conduct the necessary global clinical trials and to handle foreign authorities.

Furthermore, Yang says, the number of small biotech firms with venture capital backing is increasing. “Their business strategy is to complete initial R&D and license it out to a big pharma company at the early stage of clinical trial. This will allow them to recuperate their initial investments and continue to the next level of R&D.”

This new trend was reflected in a 2015 survey which revealed that 30 Korean pharmaceutical companies were looking in 2015 to license out 202 drugs in total, among which 49.5 percent were new drugs, 42.1 percent were incrementally modified drugs, and 8.4 percent were biosimilars.

The Time to Settle

The kind of licensing issue that could best be resolved through alternative dispute resolution is one where the dispute pertains to the scope and substance of what is licensed, says Gerald Samuel, director at Marks & Clerk in Kuala Lumpur.

“This is due to the fact that such issues would benefit from an arbitrator or mediator who has expertise in the technology being licensed and therefore can understand the technical issues in dispute,” Samuel says. “The arbitrator or mediator could then make an informed decision as opposed to the civil courts, where the judge may not have the relevant expertise. ADR may also be faster in jurisdictions where the civil court process is slow.”

Samuel notes that ADR will be more appropriate in cases when the parties are in different jurisdictions, allowing a neutral venue to be chosen. An arbitration award will be enforceable in a New York Convention country.

Other licensing issues that should be resolved through ADR, Samuel adds, are where the remedies sought may not be available in the civil courts, such as in possibilities of issuance of cross-licenses; the resolution of whether parties’ competing interests can be accommodated by geographic limitations or restrictions on the scope of use of the licenses; cases involving trading licenses for another party’s IP; and modification of the existing license from one party to the other, or the creation of an additional agreement.

Key Issues around Technology Transfer Arrangements

In Vietnam, technology transfer contracts are not subject to compulsory registration but, if they choose, contracting parties have the option of registering their contracts, says Phuc Nguyen, a partner at ZICO Law in Ho Chi Minh City. “Key issues around technology transfer pricing arrangements in Vietnam include the price and method of payment for technology transfers, and transfer pricing issues including issues related to the determination of market prices and the advance pricing agreement (APA).”

Matters revolving around the price and method of payment can be solved by both contracting parties, and payment can be made by one or several of the following methods, including one-off or instalment payment in money/goods; transfer of the value of the technology as a capital contribution to an investment project or to capital of an enterprise as stipulated by law; and other payment methods as agreed by the parties.

“Generally, a taxpayer who fails to purchase/sell, record and declare the value of goods/services in accordance with the common market value of the transaction is subject to a tax amount fixed by the relevant tax authority,” says Nguyen.

In the event a technology transfer contract is made between parties having an associated relationship, the pricing under such contract would be subject to the tax regulations applicable to transactions between “parties having an associated relationship,” Nguyen says. ‘Parties having an associated relationship’ is currently defined as parties having a relationship under one of the following circumstances: a) One party is either directly/indirectly involved in the management, control, capital contribution/investment of any form in the other party; b) The parties are either directly/indirectly subject to the management, control, capital contribution or investment of any form by another party; or c) The parties together participate directly/indirectly in the management, control, capital contribution or investment of any form in another party.

Market price and APAs are among the key issues around technology transfer pricing arrangements between parties with associated relationships.

The methods for determining the market price of products in transactions between parties having an associated relationship (also called associated transactions) include:

1) The comparable independent transaction price method. This method uses the unit price of a product in an independent transaction as the basis for determining the unit price in an associated transaction when these transactions have equivalent transaction conditions;

2) The resale price method. This method uses the resale price (or selling price) at which a product is sold by an enterprise to an independent party as the basis for determining the price at which a product is purchased from an associated party;

3) The cost-plus method. This method uses the cost of a product purchased by an enterprise from an independent party as the basis for determining the selling price at which such product is sold to an associated party;

4) The comparable profit method. This method uses the profitability ratio of a product in independent transactions selected for comparison as the basis for determining the profitability ratio of a product in an associated transaction when these transactions have equivalent transaction conditions; and

5) The profit split method. This method uses the profit earned from a combined associated transaction conducted by several associated enterprises as the basis for determining the appropriate profit for each associated enterprise in accordance with the way that independent parties share profits in equivalent independent transactions.

“Notably, under a draft law on technology transfer, technology transfer prices require auditing in case the transactions are between parties having a parent company-subsidiary model relationship or in cases where the transactions are between parties having an associated relationship,” says Nguyen.

In the event a technology transfer transaction involves parties having an associated relationship, the taxpayer may negotiate and enter into APA with the relevant tax authority.

Matters in which the taxpayer and the relevant tax authority may agree upon in an APA include the bases of tax calculation, the method of determining taxable price or taxable price under market price. The APA shall be mandatorily implemented against the tax authority and the taxpayer once the taxpayer has fully complied with the provisions and bindings that have been set out in the APA. An APA is effective for a maximum of five years and may be extended for an additional five years.

“An agreement on the price of technology transfer should be based on the market price. This is especially so in cases where the transaction is between parties having an associated relationship,” Nguyen says. “The Vietnamese government is becoming more stringent about technology transfer transactions between parties with associated relationships. A new decree on tax management with respect to enterprises having associated transactions will come into effect in May 2017, and a draft law on technology transfer (as amended) is currently being circulated to solicit public opinion.”

The Patent Pool Effect

There are several high-level characteristics about patent pools that impact licensing conditions, says Tae H. Kim, a partner at Lee & Ko in Seoul.

“First, patent pools are generally subject to antitrust scrutiny and thus are found in contexts with significant pro-competitive benefits. Most contemporary patent pools arise in standardized technologies or industries, covering standard essential and related patents. Examples include DVD, Blu-ray, IEEE 802.11 or Wi-Fi, Bluetooth, WCDMA, LTE, video/audio codec and vocoder, to name a few. FRAND principles that govern the licensing of standard essential patents also apply to patent pools,” Kim says.

Kim notes that patent pools, by their nature, are cross-licenses, and thus require certain parameters on how a licensee may behave as a licensor, and vice versa. Additionally, patent pools, like other enterprises that derive value from network effects, require a critical mass to be effective.

“Last, a patent pool must have economic terms and governance rules that are verifiably fair to its members,” Kim says. “In other words, a patent pool is a market-based and collaborative organization.”

These characteristics translate to certain parameters by which a patent pool sets its licensing conditions for a given technology. Below are the most exemplary licensing conditions for patent pools:

Royalty rates should closely reflect value of the licensed patents, but, at the same time, the determination of value should be objective so as to minimize disagreement and uncertainty, Kim says. “These two objectives are at obvious tension with each other. The simplest (and most objective and verifiable) metric of patent value is patent counting, or ‘patent points.”

In this case, a licensor enjoys a share of the total licensing revenues reflecting its total number of patents, with each patent usually being weighted by relevant sales in the corresponding country. This simple method is obviously fraught with potential problems: patentees may file as many patents as possible on the same invention, or, in patent pools that count standard essential patents, over-declare patents to standardsetting organizations.

Kim says that counter-measures include (i) using an independent body to exclude invalid and unenforceable patents, (ii) allotting a portion of the total licensing revenues for equal share amongst licensors without regard for patent count or value, so as to dull the impact of over-filing or over-declaration, and (iii) according higher value to patents proven infringed in litigation or designated for enforcement.

In oligopolistic industries (i.e. where relatively few potential licensees dominate in market share), volume discounts are common to attract the largest licensees. “Such incentives become particularly important when a large licensee does not own a correspondingly large share of the pooled patents,” Kim says. “Volume discounts need to be reasonable, so as to make the pool economically attractive to the licensors, and to withstand FRAND challenges from licensees with smaller sales.”

The cross-licensing nature of patent pools dictates certain rules of reciprocity. That is, a licensee that gains freedom to operate by paying certain royalties must be willing to grant a license under its own patents (on the pool rates and/ or on FRAND terms), Kim says. “Thus, some patent pools have a provision allowing the pool administrator to terminate a license (or technically a sublicense) to a licensee in the event the licensee refuses to grant a license to, or enforces a covered patent against, one of the pool members.”

To lessen concerns from an antitrust perspective, some patent pools allow independent licensing. That is, a pool licensor may grant a license to a non-pool-member, says Kim.

Besides using trademarks on the owners’ goods and services, there are strategies to exploit them even further by a) authorizing others to use them; b) granting franchises; and c) transferring.

The trademark owner may authorize other organizations and/ or individuals to use that mark within the scope of the owner’s usage rights, Nguyen says. “The licensing of a trademark must be established in the form of a written contract. A trademark licensing agreement may be one of the following types:

Exclusive contract, which is a contract under which, within the licensing scope and term: (i) the licensee shall have exclusive right to use the licensed trademark; and (ii) the licensor may neither enter into any licensing contract with any third party with respect to such trademark nor use such trademark without permission from the licensee.

Non-exclusive contract, which is a contract under which the licensor shall still have the right, within the licensing scope and term, to use the licensed trademark and enter into nonexclusive trademark licensing agreements with others; and

Trademark sub-license contract, which is a contract under which the licensor is a licensee of the right to use such trademark pursuant to another contract.

A trademark licensing agreement shall be valid as agreed upon by the parties involved, but in Vietnam shall only be legally effective against a third party upon registration with the NOIP, the country’s intellectual property office, Nguyen says. “The licensee must not enter into a sub-license contract with a third party unless permitted by the licensor. The licensee will have to indicate the fact that the goods were manufactured under a trademark licensing agreement on the goods, packages of the goods themselves.”

Another exploitation strategy is to grant franchises. In this case, a franchisor authorizes and requires a franchisee to conduct the purchase and sale of goods or provision of services on their own behalf and in accordance with several prescribed conditions. These conditions include the use of the franchisor’s trademark, Nguyen says. “A franchise contract must be made in writing or in another form with equivalent legal validity. A franchisee has the right to sub-franchise to a third party if agreed to by the franchisor.”

In Vietnam, a business entity may grant a franchise upon the satisfaction of all the following conditions:

That the business system has been operating for at least one year (in cases where a foreign franchisor grants a franchise to a primary franchisee being a Vietnamese business entity, such Vietnamese business entity must operate the franchise business for at least one year in Vietnam before sub-franchising);

That the business entity has registered the franchising activity with the relevant state authority; and

That the franchise goods and services are not prohibited or restricted, unless the restriction conditions are satisfied.

Last but not least, the trademark owner may transfer the ownership to another, under the following main restrictions: the trademark owner may only transfer the rights within the scope of protection, and the transfer of the rights to a trademark must not cause confusion as to properties or origin of goods/services bearing such mark.

The transfer of a trademark must be established in the form of a written contract. Such contracts shall be valid upon registration with NOIP, Nguyen adds. “A trademark is integral to a company’s business strategy. There are several alternative strategies for an owner of a protected trademark to commercially exploit his trademarks. Subject to profit return, business strategy and resources, trademark owners should choose the appropriate strategy to maximize the value of their trademarks.”